Investment Funds and How They Work Together
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Curious about the difference between mutual funds and exchange-traded funds (ETFs)? Both are popular choices for building a diversified portfolio, but there are some key differences that make each option unique. Here’s a quick look at them and how they work together with pension plans to help you meet your investment goals.
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Mutual funds are like investment buckets that pool money from multiple investors into a mix of stocks, bonds, or other securities, all managed together and traded on exchanges. Think of them as a way to diversify your investments with one single investment.
They’re usually actively managed, meaning a professional manager makes strategic decisions about which assets to buy or sell to maximize returns. That means you don’t have to make those individual decisions, but you’ll also likely pay higher fees and expense ratios, which can eat into your returns.
When you invest in a mutual fund, you’re essentially buying part ownership of all the assets within the fund. Your returns then hinge on how well the fund’s overall mix performs. Typically, mutual funds have higher minimum investment requirements than other options, like ETFs, so they may be better suited to investors ready to make a larger commitment.
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Actively, professionally managed
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Higher fees/
expense ratio
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Higher minimum investment
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Exchange-traded funds (ETFs) are bundles of investments (such as stocks or bonds) that you can buy and sell on exchanges, just like you would a single stock. Unlike mutual funds, most ETFs aren’t actively managed. Instead, they’re passively managed, meaning they usually follow a specific index, like Canada’s S&P/TSX 60. Because they’re passively managed, you’ll usually pay lower fees for an EFT.
ETFs don’t have minimum investment requirements, so you can buy as many or few as you like based on your budget. They’re traded throughout the day, so the price of an ETF changes in real time. Unlike a mutual fund, when you invest in an ETF, you don’t own a portion of a company. Instead, you own a share of the fund and the fund owns shares of underlying companies.
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Passively managed (tracks an index)
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Lower fees/
expense ratio
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How Does a Pension Fit Into My Investment Strategy?
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Pension plans like SPP are different from mutual funds and ETFs. While mutual funds and ETFs can serve any number of goals, pension plans are designed specifically for retirement savings and offer unique benefits that complement mutual funds and ETFs.
With SPP, your pension contributions are pooled and invested in professionally managed funds, much like how a mutual fund works but without the high fees. That means more of your money is working for you.
SPP has no minimum contribution requirement, so it’s accessible to anyone in Canada (18-71 years old) with available RRSP contribution room. Your contributions grow tax-free until you retire, providing a valuable tax benefit. Just be sure to keep an eye on your RRSP contribution room – your pension contributions count toward it, too.
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Actively, professionally managed
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Lower fees/
expense ratio
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How Does It All Work Together?
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Mutual funds and ETFs give you flexible investment options for a variety of goals, while a pension plan focuses on securing your retirement income. Combining the three can create a balanced portfolio tailored to meet your needs throughout your life.
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Learn more about SPP and where it fits in your mix
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Get in touch today to learn how you can maximize your retirement savings with one easy-to-manage plan.
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